The but for question in incentives

The “But For” Question in Business IncentivesELLEN HARPEL, FOUNDER SMART INCENTIVES 2015

About us  Business Development Advisorsis an economic developmentconsulting firm

 Smart Incentives helps communitiesmake sound decisions throughout the incentives process

2 © 2015 SMART INCENTIVES

What does “but for” mean?  Funds are essential for a project to be initiated or completed; “but for” the funds, the project would not have occurred.  Incentives induce a company to invest where it otherwise would not have; “but for” the incentive, would the investment have occurred?

 Sources: Urban Institute, IEDC


Is “but for” integral to incentives?  “Incentive” has looser definition and general usage than “but for.”  We use incentives to accomplish our economic development goals – “but for” ignores this.  Is a “but for” standard the best way to determine whether we are spending our money wisely?


How is “but for” used?  Up-front project assessment◦ Eligibility◦ Opportunity rating

 Post-award evaluation


How is “but for” determined?  Assessment◦ Asking the company◦ Requiring them to certify◦ Limit to industries likely

to be influenced on location choice

◦ Professional judgment

 Evaluation◦ Field work (interviews,

site histories, market conditions)/judgment and interpretation

◦ External expert evaluation

◦ Comparison cases◦ Rules of thumb based

on research

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Why “but for” is not a good project assessment standard  Encourages (or requires) & rewards firms that pit one location against another  Penalizes businesses that do not wish to move by making them ineligible for incentives  Requires EDOs to make an impossible determination  Focuses attention on the deal, not the community benefits


Asking business often does not clarify the issue  From one state program evaluation:◦ 55% of businesses cited state incentives as 1 of top

3 reasons for decision ◦ 64% said they would have proceeded without the

incentive

 Different perspectives within one company  Depends on when you ask


Asking businesses . . . (2)  Recognized by researchers:

◦  “When financing packages are being assembled for some community and economic ventures, for example, even the principals may not know with any certainty what is likely to happen if a particular subsidy were not available.”

 Source: Urban Institute


When the “but for” concept is useful  Gap financing for real estate-based projects

◦ Does the project need public sector/TIF money to achieve a market-level return for the developer?

◦ Are there factors that merit an “extraordinary intervention in the largely privately-driven real estate market?”◦  Why is this different from a standard market deal?◦  What are the extraordinary costs or market failures that need to

be addressed?

 Source: CDFA


When “but for” is useful (2)  Program evaluation – still want to know if the incentive is making a difference

◦ Comparison among funded/not-funded projects◦ Comparison among similar places◦ Probability of a project occurring because of an

incentive◦ Proportion of a program portfolio attributable to an

incentive

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For discussion◦ How do you use “but-for” rule - if at all - in up-front

assessments? What are pros/cons?◦ Does use differ in your community investment

programs?◦ Does it create unrealistic expectations among

policymakers and the public?◦ Can good due diligence take the place of a but-for

standard?◦ Do you use “but for” in program evaluations? Is this a

promising direction?


Contact  Ellen Harpel President  571/212.3397

[email protected] www.businessdevelopmentadvisors.com

[email protected]://www.smartincentives.org/

@SmartIncentives


The but for question in incentives

Economy & Finance

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